Saturday, November 30, 2013

Gary North presents a very good explanation of the Bitcoin Bubble from the Austrian Economics point of view on the Money. We decided to present this RT video as well so that you can hear Bitcoin advocates as well. Unfortunately Bitcoin's parabolic rise is the most dangerous event for its future. It supposed to challenge the System - at least the FED power in the U.S. How serious is it for the System? It is Everything. All markets are at the mercy of the Fed now. Can we be certain that after 100 Year War Against Gold, FED will find resources to Crash Bitcoin and any idea about viable Currency Alternatives with it?

We have a feeling that this recent exorbitant rise in Bitcoin is purely manipulated. One thing if it is the Insiders - holders of largest number of Bitcoin amounts are gaming the rest of the market with OTC Pump and Dump style. They are trading "the restricted" amount of Bitcoin by driving the price up and will start the distribution to the crowd once liquidity will allow it.
Quite another thing if the System is already defending itself. With Bitcoin's "market cap" of 13 Billion even after recent parabolic rise to $1200, FED can easily accumulate enough amount of Bitcoin to drive the price up and then Crash it into the ground.

We do hope that it is not the case and Bitcoin will be able to stabilise somehow to preserve the brilliant idea, but with every parabolic move up in the price we are getting closer to the crash now.

"It is very important video to watch for everybody chasing Bitcoin right now. Bitcoin Foundation general counsel warns: "Everybody who buys Bitcoin right now should expect to lose everything". It does not mean that Bitcoin goes to zero tomorrow, but he is very honest with the presentation of Bitcoin, its potential and its risks.

The more we study it - the more we like the idea behind Bitcoin. The problem is not with Bitcoin - as we have wrote before, we consider it as one of the major developments in the financial industry - the problem is with the speculators driving this Bubble. Will Bitcoin survive its astronomic rise and collapse at some point to become the real alternative Currency? What will happen when 100 top holders will start cashing out? Nobody knows how high speculators can chase the Bubble, but the higher it goes the harder it will get down. For Bitcoin future it will be very important whether it can stabilise now and grow gradually presenting the real Currency alternative, otherwise its crash will expose its weakness - that it was gamed by few as usual - and crowd will chase other 60 crypto-currencies available now. But by that time nobody will be able to call it Gold 2.0 seriously.

We will monitor the situation further, but already now the chart below will be the chart of the year for us here and shows the potential for the real FIAT alternatives like Gold and Silver."

I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)

To explain my position, I must do two things. First, I will describe the economics of every Ponzi scheme. Second, I will explain the Austrian school of economics' theory of the origin of money. My analysis is strictly economic. As far as I know, it is a legal scheme -- and should be.

PONZI ECONOMICS

First, someone who no one has ever heard of before announces that he has discovered a way to make money. In the case of Bitcoins, the claim is literal. The creator literally made what he says is money, or will be money. He made this money out of digits. He made it out of nothing. Think "Federal Reserve wanna-be."

Second, the individual claims that a particular market provides unexploited arbitrage opportunities. Something is selling too low. If you buy into the program now, the person running the scheme will be able to sell it high on your behalf. So, you will take advantage of the arbitrage opportunity.

Today, with high-speed trading, arbitrage opportunities last only for a few milliseconds seconds in widely traded markets. Arbitrage opportunities in the commodity futures market last for very short periods. But in the most leveraged and sophisticated of all the futures markets, namely, the currency futures markets, arbitrage opportunities last for so brief a period of time that only high-speed computer programs can take advantage of them.

The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment. But Bitcoins are unique. The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits.

This strategy was described a generation ago by George Goodman, who wrote under the pseudonym of Adam Smith. You can find it in his book, Supermoney. This is done with financial corporations when individuals create a new business, retain a large share of the shares, and then sell the stock to the public. In this sense, Bitcoins is not a Ponzi scheme. It is simply a supermoney scheme.

The Ponzi aspect of it comes when we look at the justification for Bitcoins. They were sold on the basis that Bitcoins will be an alternative currency. In other words, this will be the money of the future.

The coins will never be the money of the future. This is my main argument.

THE AUSTRIAN SCHOOL'S THEORY OF MONEY'S ORIGINS

The best definition of money was first offered by Austrian economist Carl Menger in 1892. He said that money is the most marketable commodity. This definition was picked up by his disciple, Ludwig von Mises, who presented it in his book, The Theory of Money and Credit, published in 1912.

In that book, Mises argued, as Menger had before him, that money arises out of market transactions. That which did not function as money before, now functions as money. Something that was valuable for its own sake, most likely gold or silver, becomes valuable for another purpose, namely, the facilitation of exchange. People move from barter to a monetary economy. This increases the division of labor. As more and more people use the money commodity in order to facilitate exchanges, the division of labor extends, and as a result, people's productivity increases. They can specialize. This specialization produces increased output per person, and therefore increased income per person.

In this scenario, something that had independent value becomes the focus of traders, who find that their ability to buy and sell increases as a result of the use of this commodity. Money develops out of market exchanges. Money was not used for its own sake initially, but it becomes widely used as money as a result of innumerable transactions within the economy. (I discuss this in my chapter in Theory of Money and Fiduciary Media, published by the Mises Institute in 2012.)

Here is the central fact of money. Money is the product of the market process. It arises out of anunplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services. No one says, "I think I'll invent a new form of money."

Note: any time you see a proposal of a new form of money, hold on to your old form of money.

The central benefit of money is its predictable purchasing power. A monetary commodity is not easy to produce. The cost of mining is high. Money is slowly adopted by a large number of participants. These participants use money as a means of exchange. Why? Because it was valuable the day before. They therefore expect it to be valuable the next day. Money has continuity of value. This is not intrinsic value. It is historic value. So, a person can buy money by the sale of goods or services, set this money aside, and re-enter the markets in a different location or in a different time, in the confidence that he will probably be able to buy a similar quantity of goods and services.

Money is not accumulated for its own sake. It is accumulated to buy future goods and services. It is useful in the facilitation of exchange precisely because its market value varies little over time. It is the predictability of money's market exchange rate that makes it money.

BITCOINS ARE NOT MONEY

Now let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.

Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi's scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it's different.

This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology.People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.

Here is the Austrian school's theory of money. People buy money because it has not fallen in price. But it has also not gone up in price much, either. It is predictable. Why? Because it is held in reserve by a large number of people over a large geographical area. It has become money through tradition, through experience, and through endless numbers of exchanges on a voluntary basis. It has proven itself in the marketplace as a means of facilitating exchange, and thereby as a means of preserving value over time. This is not the characteristic feature of a Bitcoin. People are not buying it to serve as money; they are buying it because they are in the midst of a mania, and they are gambling that the number of buyers will continue upward forever.

Here is an economic fact: the number of fools is limited. They are a scarce economic resource. As the price of bitcoins rises, more fools will be lured into the market. But this is a finite market.

In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit. Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them. In other words, Bitcoins are not money; dollars are money. There has been no challenge from Bitcoins to the reign of the dollar.

JUST SAY NO

When you see an offer of an investment which inherently cannot possibly exist on its own merit, and yet lots of people are coming into the market to buy the item, you know, without any question, that this is a Ponzi scheme. In other words, people are buying into the program, not because of an arbitrage opportunity, and not because of a capital breakthrough in terms of technology, but because somebody else bought it cheaper yesterday. You buy it today, not because you think it is going to offer a stable value, but because you think you're going to make a bundle of money when more people come into the market. Again, this is the classic mark of a Ponzi scheme.

In order for Bitcoins to become an alternative currency, there will have to be millions of users of the currency. There will have to be tens of millions of users of the currency. They will have to develop in a market on their merit as money, not as an investment of dollars in order to get more dollars back. It would have to develop through exchange, not bought as an investment. In other words, the free market will have to adopt Bitcoins as a means of increasing the division of labor.

Bitcoins are not increasing the division of labor. They are bought on the basis that somebody can get into a game of musical chairs. Instead of running out of chairs, leaving one person the great winter, the promoters started with a given number of chairs, and then they hoped that lots would come and bid on the chairs. "If we issue it, they will come." This took place. The promoters creators are now very rich, as measured in dollars.

The fact of the matter is this: Bitcoins will not increase the division of labor by serving as an alternative currency. Inherently, Bitcoins have made their mark, not on the basis of their stable value in exchange, that is, their value in increasing the division of labor in alternative markets that do not use the dollar. On the contrary, Bitcoins are being purchased for one reason only: to get in on the deal. Buy low; sell high. Buy with what? Dollars. Sell for what? Dollars.

The mania has destroyed Bitcoins' use as money. Bitcoins are too volatile in price ever to serve as a currency.

Which is money: dollars or Bitcoins? The answer is obvious: dollars.

This is a Ponzi scheme.

WHAT GOES UP COMES DOWN

This will lead to the ruination of more people than any private Ponzi scheme in history. There will be the poor schnooks to get in at the end, paying perhaps thousands of dollars per Bitcoin. Then the market will unravel. It will unravel for the same reason that all Ponzi schemes have unraveled: not enough new buyers. When the new buyers do not show up in great numbers, the holders will start to dump them. What went up in price, as measured in dollars, the real money, will come down in price.

This mania is going to be the stuff of best-selling books. This is going to be this stuff of Ph.D. dissertations in economics and psychology. This is going to be the equivalent of Mackay's book, Extraordinary Popular Delusions and the Madness of Crowds.

The interesting thing is the mania started among the most technologically sophisticated people on earth: computer techies. The techies who got in early are going to be fabulously wealthy . . . if they sell. But the poor schnooks who come in at the and are going to lose money. Collectively, this will be the greatest single scheme for lots of people losing money that we have ever seen. This Ponzi scheme is not illegal . . . yet. It will spread. It has gone viral.

Any time you buy an investment, you had better have an exit strategy. There is no exit strategy for Bitcoins.

You must get out at the top, or you lose your shirt.

CONCLUSION

Anytime that anybody tries to sell you an investment, you have to look at it on this basis: "What are the future benefits that this investment will give final consumers?" In other words, how does it serve the final consumer? If it does not serve the final consumer, then it is a Ponzi scheme.

Bitcoins cannot serve the consumer. There is nothing to consume. The only way that Bitcoins can work to the advantage of the consumer is that they provides the consumer with increased opportunities, based on Bitcoins' function as money. But the fundamental characteristic of money is its relatively stable purchasing power.

Bitcoins will never achieve this. It is a mania going up. It will be a mania coming down. It will not increase the division of labor, because people will recognize it as having been a Ponzi scheme, and they will not again buy it. They will not use it in exchange. Companies will not sell goods and services based on Bitcoins. Bitcoins have to have stable purchasing power if they are to serve as money, and they will never, ever achieve stable purchasing power.

Whenever somebody tries to sell you an investment that is based on the economic analysis of a market -- an analysis that cannot possibly be true -- do not buy the investment. This is a simple rule. I adhere to this rule.

There has to be an economic justification for a capital investment, and there is no economic justification of buying Bitcoins as an alternative currency. That was how Bitcoins were initially sold, and it was impossible as an economic concept from the beginning. The Austrian theory of money shows why.

I do not invest in capital that has no economic justification other than the greater fool theory. There are too few fools to keep the scheme going.

Bitcoins are not illegal. They should not be made illegal. They should merely be avoided."

It is very important video to watch for everybody chasing Bitcoin right now. Bitcoin Foundation general counsel warns: "Everybody who buys Bitcoin right now should expect to lose everything". It does not mean that Bitcoin goes to zero tomorrow, but he is very honest with the presentation of Bitcoin, its potential and its risks.

The more we study it - the more we like the idea behind Bitcoin. The problem is not with Bitcoin - as we have wrote before, we consider it as one of the major developments in the financial industry - the problem is with the speculators driving this Bubble. Will Bitcoin survive its astronomic rise and collapse at some point to become the real alternative Currency? What will happen when 100 top holders will start cashing out? Nobody knows how high speculators can chase the Bubble, but the higher it goes the harder it will get down. For Bitcoin future it will be very important whether it can stabilise now and grow gradually presenting the real Currency alternative, otherwise its crash will expose its weakness - that it was gamed by few as usual - and crowd will chase other 60 crypto-currencies available now. But by that time nobody will be able to call it Gold 2.0 seriously.

We will monitor the situation further, but already now the chart below will be the chart of the year for us here and shows the potential for the real FIAT alternatives like Gold and Silver.

"We have another view on the recent stage of development of the financial system and Bitcoin and Gold place in it. The more we study Bitcoin phenomena - the more we are very positively surprised how many people understand the deeply fraudulent fractional reserve banking system based on FIAT.

Bitcoin is disrupting the System from within, challenging proposed Capital Controls and show appetite for FIAT alternatives. Now it is in a bubble stage - in our opinion - and whether it will survive its rise and crash remains to be seen. But it will definitely pave the way for the new monetary systems to be implemented in the future."

"We are searching answers whether Bitcoin is Gold 2.0 or just Dotcom Bubble 2.0 all over again. You know our take already, now Economist weights in with its opinion. And do not forget, please, if you were not the one left holding the bag after the Dotcom Crash, we are all benefiting from Internet revolution now. Just Do Not hold the bag this time.

Idea of Goldcoin crypro-currency based on Gold held in Vaults in Singapore, Hong Kong, Switzerland and clearing House in London can be Very elegant solution to the US Dollar hangover after QE abuse."

Gary Tanashian provides very good technical big picture overview of the S&P 500 and Gold stocks. With NYSE margin debt making another peak ahead of equities his observations could be very close to materialising in the market place. There are NO Bears left in S&P 500 and NO Bulls left in the Gold Stocks. Nothing is growing straight up to the sky, it never does.

"So far China is using all these games with Gold price suppression to accumulate Gold and this year we see the record buying. Announcement of its Gold reserves can bring the very sobering reality to the financial markets. China will not accept Bitcoin for its Treasury redemption and it is not going to increase its reserve holding any more. US Dollar is losing its Reserve Currency of choice status and all recent "flyover games" just confirm U.S. financial vulnerability in line with Sirya and Iran developments."

"We have more positive news coming from Argentina. Business climate is changing to the more positive investment outlook after the recent elections in the country. It should be translated in higher valuations of Los Azules Copper project for McEwen Mining and TNR Gold now."

We have been working a theme lately about the mania going on in US stocks (some valuations are not overly manic but policy sure is) and also the one going on in the mirror (a fun house mirror at that) in the ugly precious metals sector.

We are in a time of utter reverence for great and powerful Oz-like people doing not so great things to the rates of interest that would be paid to savers and prudent people (Zero Interest Rate Policy or ZIRP), and doing wonderful things for leverage (substance) users, speculators and asset owners (MBS and long-term T bond buying).

Slowly but surly things are coming around to policy makers’ wishes. Grandma may still be holding out with her shrinking passbook at the local bank, but more and more regular people are joining the bull party going on in stocks. It is a ‘new secular bull market’ after all! Best of all, ‘it just started this year and there’s plenty of time for it to run’ thinks a newly bullish public. As of the Fiscal Cliff drama 1 year ago, the public was firmly bearish and convinced that ‘the bear market’ and ‘the great recession’ from 2008 had not yet ended. 3.5+ years into the bull cycle, no less.

Look at the beautiful chart below with its monthly MACD ripening and its RSI doing something that has only resulted in market crashes on the last 4 occurrences, including the crash of ’87. Hopeful bulls will proclaim how long the RSI remained over bought while the stock market rose unabated from 1995 to 1998. Yes, you are right sir. But that was the mania stage of a secular bull market born by the way, of relatively sound monetary policy. This one is a cycle, just as the one that blew out in 2007 was a cycle.

T-minus 4 months?… The cyclical bull market in US stocks (a series of higher highs and higher lows, uninterrupted since March, 2009) will be 5 years old in 4 months. The manic phase of the secular bull that ended in 2000 lasted roughly 5 years. The inflation-fueled and cyclical bull market instigated by the commercial credit bubble that ended in 2007 lasted roughly 5 years.

Now the current specimen rises ever higher carrying new sponsorship that basically sat out what it thought was a bear market from 2009 through 2012. They have bought the ‘new secular bull’ promotion hook, line and sinker. How do you think this is going to end, eh Bueller? Well, probably with a blow off as manias tend to do.

Blow offs never end well. Ship of Fools, thy name is the US stock market. Yet for now, the ship sails happily through calm waters.

In the mirror we have the mess that is the HUI Gold Bugs index. The inflation mania that ended in spring of 2011 loaded the precious metals boat. The boat got heavier with refugees from the acute phase of the Euro crisis and then HUI got technical warnings 1, 2 & 3 with the critical warning being a loss of 460 (2) as silver built up a huge commercial short position in its Commitments of Traders data, and a final warning being a loss of the neckline (3) to a massive topping pattern.

Technical damage has been done on all but the biggest pictures as we watch for secular bull market down leg 4 to be put in. The trend line break (shaded yellow) is probably freaking people out right now. NFTRH has been allowing for that ugly event for many weeks now as we cover multiple bottoming scenarios that are in play. Trend lines are less important than bull market ‘higher lows’, which in this case can come anywhere above 150.

A complicating matter is the measurement of the big topping pattern, which is roughly to 100. Could that level be reached in a final puke fest and clean out of gold bugs? Yes, and it could be epic. But the index is a candidate to bottom any time now and shorter term management will help tell that story. The monthly chart above is just a big picture for perspective.

So it is getting near time to think about selling the cyclical US stock bull and buying quality situations in the counter cyclical gold stock sector because there is this quaint old notion in the financial markets; buy low and sell high and because we have a clock ticking on the S&P 500, the economy and most importantly, the policy making that has propped them.

Bottom Line

Everyone now loves the US stock market bull and utterly detests the ugly image of the gold stocks in the fun house mirror as the public has finally decided to run with the aging US stock bull and the final holdouts are throwing in the towel in the precious metals. Wall Street is running another errr, operation, with the Fed behind it with supporting policy. Within the next half a year I’d expect a long anticipated macro pivot to be engaged and a counter cyclical phase to begin taking shape.

For now I am personally both long and short certain US stocks but managing the arduous process of a coming pivot, where the idea will be to lock and load positions and then sit into the next cycle. NFTRHwill be managing this process every step of the way as it has done since inception in September of 2008. If you are so inclined, check out this service that never predicts, but always keeps the analysis in alignment with macro themes.

Friday, November 29, 2013

We have another view on the recent stage of development of the financial system and Bitcoin and Gold place in it. The more we study Bitcoin phenomena - the more we are very positively surprised how many people understand the deeply fraudulent fractional reserve banking system based on FIAT.

Bitcoin is disrupting the System from within, challenging proposed Capital Controls and show appetite for FIAT alternatives. Now it is in a bubble stage - in our opinion - and whether it will survive its rise and crash remains to be seen. But it will definitely pave the way for the new monetary systems to be implemented in the future.

"We are searching answers whether Bitcoin is Gold 2.0 or just Dotcom Bubble 2.0 all over again. You know our take already, now Economist weights in with its opinion. And do not forget, please, if you were not the one left holding the bag after the Dotcom Crash, we are all benefiting from Internet revolution now. Just Do Not hold the bag this time.

Idea of Goldcoin crypro-currency based on Gold held in Vaults in Singapore, Hong Kong, Switzerland and clearing House in London can be Very elegant solution to the US Dollar hangover after QE abuse."

"We continue our research about the Gold price suppression: who is doing this manipulation and why. With Bitcoin crossing $1000 and other crypto-currencies going parabolic we can see the hunger for the FIAT alternatives. We think that despite all very positive developments introduced by Bitcoin it is in a Bubble stage now due to its unbelievable vertical rise. Its bust will bring attention back to Gold and Silver and next step will be the introduction of crypto-currency backed by Gold - it will be the real game changer.

So far China is using all these games with Gold price suppression to accumulate Gold and this year we see the record buying. Announcement of its Gold reserves can bring the very sobering reality to the financial markets. China will not accept Bitcoin for its Treasury redemption and it is not going to increase its reserve holding any more. US Dollar is losing its Reserve Currency of choice status and all recent "flyover games" just confirm U.S. financial vulnerability in line with Sirya and Iran developments."

We have the second part of the interview with Dmitri Speckrevealing the ongoing Government interventions in the Gold market. This view from Europe on the Gold Cartel and Government Interventions in Gold market is particularly important now with the announced investigations in the Gold Market manipulation by German and UK financial regulators.

"We continue our research about the Gold price suppression: who is doing this manipulation and why. With Bitcoin crossing $1000 and other crypto-currencies going parabolic we can see the hunger for the FIAT alternatives. We think that despite all very positive developments introduced by Bitcoin it is in a Bubble stage now due to its unbelievable vertical rise. Its bust will bring attention back to Gold and Silver and next step will be the introduction of crypto-currency backed by Gold - it will be the real game changer.

So far China is using all these games with Gold price suppression to accumulate Gold and this year we see the record buying. Announcement of its Gold reserves can bring the very sobering reality to the financial markets. China will not accept Bitcoin for its Treasury redemption and it is not going to increase its reserve holding any more. US Dollar is losing its Reserve Currency of choice status and all recent "flyover games" just confirm U.S. financial vulnerability in line with Sirya and Iran developments."

"We have another view - from Europe this time - on the ongoing Gold manipulation, its mechanics and the motivations behind it. UK financial authorities have launched the investigations in the Gold market manipulations now. We do not hold our breath here, but hope that they will get at least this information for consideration.

Manipulation is conducted on everyday basis with the aim to drive the Gold fixing price in London down and get access to physical Gold, which could be sold at a premium at the next trading day in Asia. "This arbitrage" was a normal source of profit for LBMA banks, but now starting from April of this year we have the additional waterfall smashing of Gold in order to manipulate the QE inflation expectations in the market."

"We are witnessing the watershed events in the financial markets these days. Bitcoin has reached the parity with Gold today crossing $1242 before crashing to $1000, now it is back to $1178. We will repeat: congratulations to everybody who bought it cheaper and is able to sell now. Bitcoin exorbitant rise show the future for the real alternative to FIAT currencies. Its spectacular fall will drive attention to the real value: Gold and Silver. With new revelations from Kissinger about the Gold Suppression, rise of Bitcoin demonstrates the unleashed potential for Gold and Silver free of manipulation."

We are searching answers whether Bitcoin is Gold 2.0 or just Dotcom Bubble 2.0 all over again. You know our take already, now Economist weights in with its opinion. And do not forget, please, if you were not the one left holding the bag after the Dotcom Crash, we are all benefiting from Internet revolution now. Just Do Not hold the bag this time.

Idea of Goldcoin crypro-currency based on Gold held in Vaults in Singapore, Hong Kong, Switzerland and clearing House in London can be Very elegant solution to the US Dollar hangover after QE abuse.

"We are witnessing the watershed events in the financial markets these days. Bitcoin has reached the parity with Gold today crossing $1242 before crashing to $1000, now it is back to $1178. We will repeat: congratulations to everybody who bought it cheaper and is able to sell now. Bitcoin exorbitant rise show the future for the real alternative to FIAT currencies. Its spectacular fall will drive attention to the real value: Gold and Silver. With new revelations from Kissinger about the Gold Suppression, rise of Bitcoin demonstrates the unleashed potential for Gold and Silver free of manipulation.

All crypto-currencies are on fire these days with Litecoin crossing $50 and we can see here the danger to this very remarkable idea. Will Bitcoin sustain its rise to $2000 and fall to $50? It is not currency at the moment, but asset Bubble chased by the crowd attracted by "unbelievable returns on investment." System is taking notice and will make all possible moves to discredit Bitcoin. Bitcoin's success will the major problem to overcome here. Now it looks like classic OTC market Pump and Dump: few insiders are controlling the flow, price is pushed up in deals between insiders and crowd is attracted at more and more higher prices with rising volume and distribution by insiders.

Expect the "active management of Bitcoin" now: rumours about the NSA cracking the encryption, hackers stealing BTCs and compromised Exchanges. The price going to the sky will trigger insiders selling itself and then it will the question how Bitcoin can withstand it.

In the modern age of Currency Wars and announced Financial War stage with China threatening the US Dollar Reserve Currency of choice status, we will ask very important question: Who is really behind Bitcoin? Even if it is not introduced by countries like China and Russia now - they are taking notice. People are getting out of dollars and other FIAT currencies and even Gold and Silver prices are affected by the BTC rise. The only thing BTC lacks in order to become the real Money is stability and "accepted system guarantees". Now lets imaging that somebody will introduce crypto-currency, but backed by Gold and going into the mainstream. This will be the real game changer and who knows maybe somebody is testing the grounds already.

Virtual currency: It is mathematically elegant, increasingly popular and highly controversial. Bitcoin’s success is putting it under growing strain

ALL currencies involve some measure of consensual hallucination, but Bitcoin, a virtual monetary system, involves more than most. It is a peer-to-peer currency with no central bank, based on digital tokens with no intrinsic value. Rather than relying on confidence in a central authority, it depends instead on a distributed system of trust, based on a transaction ledger which is cryptographically verified and jointly maintained by the currency’s users.

Transactions can occur directly between the system’s participants at almost zero cost, without the need for a trusted third party or any other intermediary, and are irreversible once committed to a permanent and fully public record. Bitcoin’s mathematically elegant design ensures that the money supply can increase only at a fixed rate that slows over time and then stops altogether. Anonymity, while not assured, is possible with the right precautions and tools. No wonder Bitcoin is so appealing to geeks, libertarians, drug dealers, speculators and gold bugs.

Bitcoin began in 2008, at the height of the financial crisis, with a paper published under the pseudonym Satoshi Nakamoto. The technical design outlined in the paper was implemented in open-source software the following year. It came to widespread prominence in 2012 and has been in the headlines ever since.

Investors are backing Bitcoin-related startups, the German finance ministry has recognised it as a “unit of account” and senior officials told an American Senate committee on November 18th that virtual currencies had legitimate uses. But there have also been many cases of Bitcoin theft. Exchanges that convert Bitcoin to other currencies have collapsed or closed. Silk Road, an online forum where illicit goods and services are traded for Bitcoin, was shut down by America’s Federal Bureau of Investigation in October but has since reopened. The Bitcoin price has fluctuated wildly, hitting $230 in April 2013, falling below $70 in July, and then exceeding $600 in November, prompting talk of a bubble.

The system is now straining at the seams. Its computational underpinnings have collectively reached 100 times the performance of the world’s top 500 supercomputers combined: more than 50,000 petaflops. Bitcoin’s success has revealed three weaknesses in particular. It is not as secure and anonymous as it seems; the “mining” system that both increases the Bitcoin supply and ensures the integrity of the currency has led to an unsustainable computational arms-race; and the distributed-ledger system is becoming unwieldy. Will Bitcoin’s self-correcting mechanisms, and the enlightened self-interest of its users, be able to address these weaknesses and keep Bitcoin on the rails?

Bitcoin uses a technique called public-key cryptography, which relies on creating an interlocking pair of encryption keys: a public key that can be freely distributed, and a private one that must be kept secret at all costs. The public key is treated as an address to which value may be sent, akin to an account number. Each transaction involves the paying party signing over a portion or all of the value in one of these addresses by using his private key to perform an operation, called “signing”, on the contents of the transfer, which includes the recipient’s address. Anyone can use the sender’s public key to verify that the sender’s private key signed the transaction. All transactions are appended to a public ledger, called the block chain.

Public keys are ostensibly anonymous, because they are created randomly by software under the control of each user, without central co-ordination. But it turns out that the flow of money from specific addresses can be tracked quite easily. In a paper presented in October, academics from the University of California, San Diego, and George Mason University engaged in a series of ordinary transactions to collect commonly used addresses for Bitcoin wallet services, gambling sites, currency exchanges and other parties.

Follow the money

The researchers exploited a current weakness in most Bitcoin personal and server software, which generates single-use addresses to store change from transactions. This allowed them to follow the movement of Bitcoins across hundreds of transactions from large sums accumulated at single addresses, including ones suspected of being controlled by Silk Road and stolen funds from exchanges. One of the authors, Sarah Meiklejohn, says that the same technique could easily be used to provide the basis of warrants to serve against exchanges or other parties. Law-enforcement agencies would regard this as a good thing, but to advocates of a completely secure and anonymous online currency, it represents a worrying flaw. Ms Meiklejohn says most current implementations of the Bitcoin protocol fall short of the level of anonymity that is theoretically possible, and that her group’s efforts represent just the tip of the iceberg of what could be deduced from analysis of the public block chain.

The Bitcoin system offers a reward to volunteer users, known as “miners”, who bundle up new transactions into blocks and add them on to the end of the chain. The reward is currently 25 Bitcoins (about $15,000 at this writing). Miners pull active transactions waiting to be recorded from the peer-to-peer network and perform the complex calculations to create the new block, building on the cryptographic foundation of the previous block. Comparison of the results produced by different miners provides independent verification. About every 10 minutes, one lucky miner who has generated the next block is granted the 25-Bitcoin reward, and the new block is appended to the chain. The process then starts again.

Mine craft

The Bitcoin system is designed to cope with the fact that improvements in computer hardware make it cheaper and faster to perform the mathematical operations, known as hashes, involved in mining. Every 2,016 blocks, or roughly every two weeks, the system calculates how long it would take for blocks to be created at precisely 10-minute intervals, and resets a difficulty factor in the calculation accordingly. As equipment gets faster, in short, mining gets harder. But faster equipment is constantly coming online, reducing the potential rewards for other miners unless they, too, buy more kit. Miners have formed groups that pool processing power and parcel out the ensuing rewards. Once done with ordinary computers, mining shifted to graphics-processing units, which can perform some calculations more efficiently. Miners then moved on to flexible chips that can be configured for particular tasks, called field-programmable gate arrays. In the past year, bespoke chips called ASICs (application-specific integrated circuits) have appeared on the scene.

Your correspondent visited a miner who operates a rack of mining hardware in his modest apartment. He had purchased his ASIC-based hardware a few months earlier, and it had arrived weeks late, causing him to miss out on a bonanza, because after arrival, the kit generated Bitcoins so quickly that it paid for itself within three days. But the edge that ASICs provide is quickly eroding. Between July, when the gear arrived, and mid-November, the computational capacity of the Bitcoin network increased 25-fold, from 200 trillion to 5 quadrillion hashes per second. This was due in part to the arrival in September of a newer generation of more efficient ASICs. Hashing capacity has increased so rapidly in 2013 that the practice of hijacking thousands of PCs and using them for mining is no longer worth the effort. The average time between blocks has fallen to between five and eight minutes.

The general consensus, says Mike Hearn, one of the volunteers who maintain the Bitcoin software, is that with this new generation of ASICs, mining will have approached a point where only those with access to free or cheap electricity will continue operations, and even they will produce a relatively marginal return on investment, rather than the huge multiples (when exchanged into traditional currency) possible even earlier this year. Mining has become increasingly commercial and professional, he says. Server farms with endless racks of ASIC cards have already sprung up. But as part of Bitcoin’s design, the reward for mining a block halves every 210,000 blocks, or roughly every four years. Sometime in 2017, at the current rate, it will drop to 12.5 Bitcoins. If the returns from mining decline, who will verify the integrity of the block chain?

To head off this problem, a market-based mechanism is in the works which will raise the current voluntary fees paid by users (around five cents per transaction) in return for verification. “Nodes in the peer-to-peer network will try to estimate the minimum fee needed to get the transaction confirmed,” says Mr Hearn.

Bitcoin’s growing popularity is having other ripple effects. Every participant in the system must keep a copy of the block chain, which now exceeds 11 gigabytes in size and continues to grow steadily. This alone deters casual use. Bitcoin’s designer proposed a method of pruning the chain to include only unspent amounts, but it has not been implemented.

As the rate of transactions increases, squeezing all financial activity into the preset size limit for each block has started to become problematic. The protocol may need to be tweaked to allow more transactions per block, among other changes. A further problem relates to the volunteer machines, or nodes, that allow Bitcoin to function. These nodes relay transactions and transmit updates to the block chain. But, says Matthew Green, a security researcher at Johns Hopkins University, the ecosystem provides no compensation for maintaining these nodes—only for mining. The rising cost of operating nodes could jeopardise Bitcoin’s ability to scale.

“The volunteer programmers who work on Bitcoin’s software have no special authority in the system.”

The original paper that sparked the creation of Bitcoin has since been supplemented by layers of agreed-upon protocol, updated regularly by the system’s participants. The protocol, like the currency, is a fiction they accept as real, because rejection by a large proportion of users—be they banks, exchanges, speculators or miners—could cause the whole system to collapse. Mr Hearn notes that he and other programmers who work on Bitcoin’s software have no special authority in the system. Instead, proposals are floated, implemented in software, and must then be taken up by 80% of nodes before becoming permanent—at which point blocks from other nodes are rejected. “The rules of the system are not set in stone,” he says. The adoption of improvements is up to the community. Bitcoin is thus both flexible and fragile.

So far, it has kept going. But can it withstand the pressure as it becomes more popular? “It’s got this kind of watch-like feel to it,” says Mr Hearn. It keeps on ticking, but “a mechanical watch is fragile and can be smashed.” Perhaps Bitcoin, like the internet, will smoothly evolve from a quirky experiment to a trusted utility. But it could also go the way of Napster, the trailblazing music-sharing system that pioneered a new category, but was superseded by superior implementations that overcame its technical and commercial flaws."

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